Asian currencies face heightened volatility amid uneven AI-driven trade recovery in Year of the Fire Horse

Asian currency markets begin the Year of the Fire Horse confronting a mix of strengthening external positions and persistent domestic divergence that could accelerate moves , but also amplify volatility.

Regional currencies ended the preceding lunar year on firmer ground after several years of net weakness versus the US dollar. According to Bloomberg data, the Bloomberg Asia Dollar Index climbed by a little over 3% through the past Lunar Year, yet that headline improvement masked stark differences across markets. The Malaysian ringgit surged by more than 12% while the Indian rupee fell nearly 5%, underscoring that the broader recovery remains incomplete. AInvest similarly notes the uneven pattern of gains and losses across Asia.

Much of the renewed resilience can be linked to the AI investment cycle. Industry trade data compiled by the World Trade Organisation shows Asia accounting for roughly two-thirds of AI-related trade growth in the first half of 2025, with hardware and related components concentrated in the region. That demand has helped lift aggregate current account positions, Nomura and other data contributors estimate the regional surplus rose to around 4.5% of GDP in 2025, driven by large surpluses in Korea and Taiwan and stronger flows across semiconductor supply chains that benefit Malaysia, Singapore, Thailand and the Philippines.

The flow of investment into data centres, high-performance servers and chip production has therefore become an important tailwind for currencies exposed to those sectors. HSBC’s Asia research highlights the region’s deepening role as the hardware backbone of AI, while asset managers and markets commentators point to record trade balances in parts of Greater China during 2025 as evidence of the shift.

Yet the AI narrative is uneven. Exposure varies from advanced wafer fabrication in Korea and Taiwan to assembly, testing and peripheral services in Southeast Asia. As such, the distributional consequences for trade and capital receipts differ, and the cycle’s inherently cyclical nature means momentum can fade if corporate spending slows or earnings disappoint. The Monetary Authority of Singapore warned in its 29 January 2026 Macroeconomic Review that a synchronised slowdown in AI investment could not be discounted, a risk that would feed through to external balances and market sentiment.

Capital flows likewise remain a key pivot. For decades Asian surplus savings were recycled into US assets; the US share of Asia’s overseas investments rose from roughly 37% in 2020 to about 41% in late 2024 before easing to around 40% in 2025, according to regional asset allocation estimates. Periodic shifts away from dollar assets have already produced marked moves: in Q2 2025, changes in investor positioning helped push inflows into local-currency Asian debt and supported a roughly 4% appreciation across regional currencies, Bloomberg data show.

Market correlations are also changing. Mission Media reports that the 30-day correlation between Asian equities and regional currencies turned negative for the first time since September 2024 as equities rallied on AI-related optimism while some currencies weakened to fund outflows or as central banks eased. That disconnect has been visible elsewhere too; Yahoo Finance and other outlets have highlighted one of the strongest starts to the year for Asian equities in decades, even as exchange-rate moves have not mirrored equity gains uniformly.

Domestic policy settings and idiosyncratic developments remain decisive in separating winners from losers. Malaysia’s rebound drew on policy stabilisation, structural reforms and targeted capital expenditure, producing a marked recovery for the ringgit. Korea benefits from deep AI hardware exposure and could attract fresh inflows if inclusion of Korea Treasury Bonds in global bond benchmarks, scheduled for April 2026, lifts demand, a development market strategists say could be material. India’s trajectory, by contrast, rests more on domestic macro management and high local bond yields; S&P’s recent upgrade of India’s sovereign rating to BBB from BBB–, its first in 18 years, reinforced perceptions of policy credibility and helped explain why the rupee does not track the AI cycle as closely as some peers.

Not all domestic stories are benign. Moody’s downgrade of Indonesia’s sovereign outlook and high-profile corruption probes in the Philippines illustrate how governance and politics can rapidly reshape investor appetites and currency trajectories.

Looking ahead, three forces appear likely to shape outcomes: the durability and breadth of AI-driven trade gains, whether surplus savings are reallocated away from dollar assets and into Asian markets, and the patchwork of domestic macro and political conditions across economies. ING’s FX outlook highlights scope for upside in the yuan, won, rupee, yen and rupiah under scenarios of sustained inflows and contained inflation, though it also flags the role of expected rate cuts in some economies.

That combination means volatility could rise even as directional opportunities emerge. A reassessment of Fed easing expectations, renewed dollar strength or a global growth slowdown would all curb capital inflows and test recent gains. Conversely, continued trade strength and higher hedge ratios on US assets could mechanically add dollar-selling pressure and lift local currencies.

Investors and policymakers therefore face two tasks simultaneously: to capture potential gains from improved external accounts and sectoral demand, while maintaining discipline against rapid reversals. As commentators at HSBC and other institutions observe, the year’s speed and intensity may reward nimble positioning, but the diversity of domestic fundamentals means each market will run its own course.

A version of this analysis first appeared in The Edge Singapore on 27 February 2026.